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Boards at Risk 1
Copyright 2016 © IMD - Temasek Management Services Pte Ltd, All rights reserved.
Boards at Risk 2
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SYNOPSIS
The Board's main responsibility is to steward its institution through risks and opportunities. Nonetheless, boards are
also at risk—their exposure goes beyond the immediate success or failure of the institution they supervise—they
need to balance long-term stewardship with short term survival. Boards are at risk because of their own ability (or
lack thereof) to steer complex institutions through the murky meanders of reputational hits, business disruptions,
economic shocks, leadership breakdowns and organisational failures.
Boards are ill-prepared to oversee and manage the rising complexity and normalisation of deviance. They need to
better understand what strong risk prevention and rich opportunity optimisation entails. They often rely on gut and
overlook the lessons from sophistication, thus putting themselves at risk.
Facilitated by Professor Didier Cossin, the session will explore best board risk practices, inspired by his clinical work
with boards in Asia, Africa, Europe and Americas and explore cases on reputation hits (VW, FIFA), economic tsunamis
(ICBC, the Fed, UBS, Sinopec), geopolitics (United Nations, Gazprombank, The Red Cross), misconduct (Standard
Chartered) and near-death experiments (Nokia). Professor Cossin will be joined by eminent chairmen and directors
to discuss:
• Risk lessons from recent times
• Causes of 95% of board failures
• The four pillars of risk thinking
• Disruptive behaviours and board breakdowns in front of risks
• Building the risk culture from the board
• Principles of risk education
• Diagnostics of risk preparedness
• Red flags of risk unpreparedness
This white paper includes a summary of the presentations, as well as key insights from the discussions at the forum.
Boards at Risk 3
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INTRODUCTION
Boards are at the forefront of risks. It is at the heart of the board’s mission to assess and supervise risks, as well as to
steer the organisation towards major opportunities. This requires board members to be proficient in risk knowledge,
which spans from techniques to philosophy.
Beyond classical risk thinking, the dramatic economic, technological and social changes we are witnessing globally
has led boards to explore new combinations of social conservatism, value-based leadership and disruptive
entrepreneurship. In the process, boards are venturing into uncharted waters and encountering new types of risk.
Concluding the March 2016 instalment of TMS Academy’s Directors-in-Dialogue series was a panel discussion on
what boards can do to anticipate and manage risk. In particular, the discussion zoomed in on the issue of reconciling
today’s renewed focus on governance and compliance on the one hand with an organisation’s capabilities in
entrepreneurship and innovation on the other. The nature and implications of disruptive change were explored at
length, as were the broader, underlying trends related to business and its role in society. The panel included Erich
Hunziker, Chairman of BB Biotech AG; Tan Suee Chieh, Group CEO of NTUC Enterprise Co-operative Limited; and Teo
Swee Lian, Independent Director at Singapore Telecommunications Limited.
I. CLASSICAL RISK THINKING
Risk thinking used to be reserved for the back office and risk reports used to put board members to sleep. Not
anymore. The confusion and the impact of risk has increased dramatically, and those companies that have
developed special skills, flexibility and acumen, have gained a terrific advantage.
We find that best risk practices are aligned along the following four dimensions:
1. Physical health check – What are we exposed to?
2. Mental health check – Are we capturing the right problems?
3. Strategic check – Are we doing the right moves?
4. Governance check – Are we well structured for continued awareness?
Too many boards limit board thinking to the first dimension only. Slippage on any one of the four dimensions may
doom a company to failure or underperformance. When times were good, underperformance was often acceptable
because everybody was doing well. In today’s tough times, underperformance is no longer acceptable. Being
unhealthy during an epidemic is not the same as being unhealthy during good times. Money has become scarce, the
generosity of fund providers is waning and the competition is becoming tougher. We all know that some will do
particularly well.
Fortunes are also made during these times of survival of the fittest. In the following paragraphs, we discuss, in more
detail, the four dimensions critical to maintaining adequate risk fitness. It is important that corporations focus on all
four dimensions to ensure success. If a company does not balance its focus across all four, then they can jeopardise
their risk fitness.
The Physical Health Check: Technical Risks
First and foremost, a physical health check is necessary. By now, every firm should be aware of where it hurts.
Ideally, they will also be aware of where its major clients and suppliers are feeling pain.
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We are puzzled by companies that are almost surprised when they encounter difficulties through volatility of well-
known risky quantities such as interest rates, currencies, oil and other commodity prices. The high variance of these
has long been demonstrated and the last 20 to 40 years only inform us of the incredible uncertainty that we can rely
on. In today’s world, nothing should surprise us anymore. We need to open our minds to new risks, to all risks, and
somehow prepare ourselves for them. While preparation can never fully prepare an organisation for the actual risks,
it still helps frame the mind, the organisation and the network so that those prepared can react faster, better and
stronger. There are immediate lessons on risks that can be taken from financial markets recent evolution.
LESSON 1: THERE IS NO SINGLE BEST WAY TO MEASURE RISK
We have to say that techniques have value. Financial models look for simple solutions such as volatility or standard
deviation to match with the real world in an effort to eliminate risk. Are these measures working?
One major issue with these measures is the linkage of risks. In extreme situations, risk linkages are very different.
Copulas, one of the most sophisticated risk tools, is a mathematical function that models how risks link. However,
copulas are highly unstable. At best, these measures give a view, often biased, of risk under certain framework.
Using these tools poses a great challenge, as they might fail. The financial market does not equate to physics. In
reality, when you take action, your behavior may alter the risk profile and start a feedback loop that invalidates your
reasoning. Professional managers often fail when the framework does not work.
What are we to do when risk measures do not work? Having several technical frameworks to think about risk and
developing a risk culture are key. For non-normal distribution, we have technically an infinite number of risk
measures that work. When the world evolves toward non-normal set up, we have to consider many risk measures.
LESSON 2: IRRATIONALITY CAN DRIVE RISKS AND DIVERSIFICATION ITSELF IS AT RISK
Market irrationality has been demonstrated to hold for long times, sometimes beyond a decade. Bubbles can be long
lasting. This threatens rational risk methods. It is commonly considered that if one cannot measure risk, it is best to
eliminate risks through diversification. Stated simply, diversification is based on correlations. However, correlation
measures rarely work.
When looking at risk, we tend to view it as cyclical. Risk does not need to come back and diversification might not
work. We have to integrate the emotional and speculative sides into analysis. The reality is that we do not need a
physical correlation; it could be the result of a mental view or due to psychological linkage. Stability of the links is
then highly suspicious.
LESSON 3: RISK PICKING IS A MAJOR RISK BY ITSELF. NOT PICKING RISKS IS PICKING RISKS
Major mistakes at the top of the bank have been a bigger source of failure than any other Basel risk. The UBS case is
an illustration of the behavior risk of arrogance. UBS’s ambition was to be the leading investment bank in the world.
UBS’s board neglected a major risk, through its lack of knowledge; it was unaware of how exposed to the CDO
market it was, despite its bringing 40% of the bank’s profits. There was also the strategic risk due to its aspiration to
be the number one investment bank. This aspiration reinforced its decision to stay in the market and to weather the
storm.
LESSON 4: RISK DOES NOT HAVE A SHAPE AND RENEWS ITSELF ALL THE TIME
Markets evolve; risks evolve. New products often entail untested risk. In 2012, JP Morgan Chase lost $7 billion, “a
tempest in a teapot” as Jamie Dimon put it. A trader in London, “the London whale,” who was hedging the balance
sheet of the bank, lost $7 billion on a simple derivative CDX.NA.IG.9. The trade was supposed to hedge the default
Boards at Risk 5
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risk of the loans for the large corporations. Apparently, the hedging became speculation. On the board’s risk
committee, there were three independent directors. None of them had banking or risk experience- one was the
director of a museum. Boards can be the new risk of organisations, through their lack of knowledge, lack of
commitment, or lack of preparation. Hence the justified public consideration for boards as a risk factor.
As threats and opportunities may come from many different sources, risks are converging, interconnecting and
amplifying complexity. For example, in oil and gas, the drop in oil prices has created ripple effects that go much
beyond revenues and impact the value chain much beyond the organisation itself, touching suppliers, countries,
clients and affecting geopolitics. Thus, we cannot rely on our old estimates. Instead, we must put the plan on the
drawing board again. For this, we suggest the following four-step process for technical risk mastery:
1. Identify your Risks
Identifying risks is too important be left to a bottom up approach. Your employees – whether it is a single
person or a single department – will often miss the big picture. The view of the top level of management
must be fed by bottom up of reporting (with open lines of communication in the corporation).
One well-known company, when it started risk reporting to their board, decided to conduct a large survey,
which involved most employees. It then compiled the data and reported its findings to the board. The major
risk – i.e. the one that was consistently rated as having high impact on each and every employee – was VAT
compliance, which was hardly a major corporate risk. Thus, the compilation of individual employees’ views
of major risk, without the benefit of top-management’s view, may not result in a good view of risk for the
whole corporation. However, taking the bottom up approach and listening to different viewpoints is still
important as the following example illustrates. In April 2007, a trader at UBS reported difficulties on
subprime structured products to his boss. This could have been a strong signal to top UBS management. The
chairman’s office did not see the signal, closed the trader’s outfit and integrated it in the UBS Investment
Bank with little proper risk identification. And we all know how that ended.
Old ways of risk identification also need to be revisited. For example, bank deposits may have looked stable
in the past. But, rethinking that exposure may be essential in today’s uncertain world.
2. Assess your Risk
Once major risks have been identified, it is crucial to assess them to gain a better understanding of these
risks. Even non-quantifiable risks can be assessed. The assessment does not need to be exact, as risks cannot
be fully assessed. Otherwise, they would not be risks. The role of the assessment is not to be successful in
the assessment, but rather, to grow awareness and develop a common language that can then be used to
communicate and prepare for the risk.
Many tools are available for assessment. The use of multiple tools is recommended for large investments or
in sensitive areas. Sensitivity analyses (tornado diagrams or spider diagrams), scenarios and Monte-Carlo
simulations are all useful tools, with different granularity and different ease of use. A verbal assessment
done by those closest to risk is also useful. The goal is not to increase paperwork; instead, the role is to
increase awareness, and thus, we welcome all tools that help us get closer to a true awareness of the
potential impact of the identified risks. No one technique can be right and thus the compact use of multiple
tools is a necessity for proficient boards.
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3. Manage your Risks
If risks are present, isn’t it best to eliminate them? If this is the case, then managing risks may become
fundamental. Here, we would like to highlight that being too conservative is an issue. Your investors expect
you to take risks. You should only eliminate those risks that are not core, and then risk management should
be conducted with full transparency. For example, gold mines hedging gold prices without full disclosure
may be misleading investors that have chosen them for their gold price exposure. We find that the best risks
to manage are those that create more downside than upside. Airlines’ exposure to fuel costs may be a good
example. An airline has more to lose when oil prices are very high than it does with when they are very low.
Southwest’s remarkable move to hedge fuel costs at about $25 per barrel from 2004 to 2009 has been the
major reason of its continued profitability while all other US airlines were in the red. BMW, on the other
hand, stopped its euro/$ hedges too early thus losing €1.5 billion on these currencies. This shows that some
are viewing hedges as a timing issue. If CFOs or treasurers were so good at timing, they would become
traders, make more money and would be finished working by 5 p.m. Thus, for any risk management
program, two questions should be asked: (1) Does it truly create value for our shareholders? Many risk
management programs create comfort for managers rather than add value to the business. (2) Does it
depend on timing? Any management program that depends on timing is a speculative pro- gram. You then
have to ask the question: are you good at speculation?
4. Structure your Risks
Finally, the structuring of risks – or sharing of risks – has had dramatic success in recent times. This entails
identifying different risk exposures in a company’s network of relationships (investors, clients, suppliers,
etc.) and agreeing to share the risks with those least sensitive to them (i.e. those most able to overcome the
risks), to create value for all. This principle has often been used in joint ventures and acquisitions (with earn
outs) as well as in commercial contracts. For example, Syngenta, one of the largest producers of fertilisers
and pesticides in the world, has boosted its Latin American business by providing farmers with yield
guarantees. The high risk farmers (who typically go bankrupt in bad times) are able to pass on some of their
risks to Syngenta. Syngenta, in turn, can direct them towards a commodity trader. In this way, Syngenta
obtains more business, with less credit risk (since chances are that the “insured” farmers are more likely to
pay) and at typically higher prices for its products. Syngenta’s lessons from Latin America can now be levered
in the US and in Eastern Europe and Russia. In today’s turmoil, with parties so sensitive to risk, smart risk
structuring can make a big difference.
Once the physical check is complete, it is time to address the mental check, the strategic check and governance
check. We have kept these briefer, but it is important to note that deep investigation in these areas can also create
much value.
The Mental Health Check: Behaviours
The question we ask is: How is your attitude? We all know that market sentiments have taken many by surprise; the
reality is that such sentiments are well-known factors of risk nowadays. Markets are somewhat crazy, but markets
may be just a reflexion of ourselves. Are we much better than they are? And, thus, this raises the question: Can we
look at our failings?
We now have good views of typical behavioural risks that arise. As a checklist, senior management should test itself
on the following different dimensions – a classical roster of seven behavioural risks:
Boards at Risk 7
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1. Herd behavior: Are you following the herd? Many prefer to have company when they are wrong
rather than be wrong alone. This is particularly true of management levels where all cannot be fired at once.
And, thus, it is typically much safer to be wrong with others. Unfortunately, this type of behavior has
certainly contributed to getting us into today’s mess. Thus, it is useful to revisit past decisions, successful
ones as well as failures, and see where you stand, you as an individual, you and your team, you and your
company.
2. Optimism: When asked if they are counted in the top 1% of the richest in America, a full 15% of the
US population answers yes. Are you a better driver than average? A better manager than average? Is your
company particularly insulated in the crisis? A reality check may be warranted.
3. Over-confidence: The best professionals acknowledge that predicting oil prices is close to
impossible. The same can be said for predicting currencies or predicting markets. What about you? Most of
us have views and many of us start believing our own views. Thus, the question is: do you truly know how
little you know? Not surprisingly, most of the senior managers with whom we have administered this test,
fail it. They are leaders, and one does not lead others with self-doubt. Unfortunately, in difficult times, taking
some time for self-doubt is important.
4. Belief perseverance: Have you held the same views for a long time, despite the large shifts in the
world? If so, are they steady or are they rigid? Most of us do not adapt fast enough; we do not have the
flexibility. While humans have been remarkably adaptive as a species, we are still being pushed around. How
fast can you evolve to the new environment we are facing? Do you still expect the old times to come back? If
so, it’s time for a reality check.
5. Hindsight bias: Are you the type of person who tends to think: “I told you so. I knew it.” If so, are
you looking back in time truthfully, or are you second-guessing how you truly would have reacted from
today’s situation, rather than from the past.
6. Anchoring: Are you holding on to your stocks because they used to be worth three times more and,
thus, it would be a loss to sell them now? Is your view of your assets linked to what they were a few years
ago?
7. Representativeness: Finally, do you believe that markets will come back up because they always do?
Do you believe the cycle is four to five years as it traditionally has been? Are you looking for some pattern to
repeat itself? Sometimes true, life-altering changes happen, e.g. the Russian revolution or nuclear
development, and we have to accept that this is a possibility. Some events have changed the world in such a
way that past patterns do not come back.
All of these behavioural patterns act as liabilities against your awareness of risks. Just checking where you stand,
where your team stands and where your organisation stands will help you figure out the reality.
Strategic Check
Strategic failure and blind spots can also pose serious problems for boards. For example, Kodak was the inventor of
digital photography in 1975, but was unable to find a way to adapt its business model to take advantage of the
opportunity. Kodak went bankrupt in 2012.
As major shifts happen, strategies need to be revisited. Holding on to past strategies does not make sense. But
developing new strategies, or adjusting passively to the markets, is not much better. While strategic thinking is
complex, and the building of strategies requires much work, from client and competitor awareness to abilities to
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build on one’s core distinctiveness, there are ways to test overall strategic choices for their pertinence. And, thus,
the question we ask is simple: Is your strategy shift a smart move?
A. Typical strategies: There are a limited number of typical strategies. Using Paul Strebel’s “Smart Big Moves”
framework, all big moves can be classified into five categories:
1. Going for growth, which happens when you roll out a product for example.
2. Restoring profitability, as when a company needs restructuring.
3. Finding a new game, when a company attempts to reinvent oneself
4. Relaunching growth, when a company levers its distinctiveness to differentiate itself from
competitors or substitutes
5. Realignment, when a company realigns its value proposition to its customers through a revised value
chain, with capability development, for example with process efficiency.
B. Smart or stupid? Once the move is well identified (and this can be done for clients and suppliers as well),
one needs to question it. Is the strategy smart? Overall, smart moves will:
1. Lever the company’s distinctiveness, i.e. its objectives, values, culture and capabilities, in terms of
skills and resources, and its resources, in terms of assets, clients and partners.
2. Not fall into psychological traps: such as we can beat the competition no matter what we do, we
know what the customer needs or we never admit defeat; we always move forward.
3. Address significant market opportunities.
First, assess the strategy and the move considered. Then confront to competitors’ moves, customers’ needs and
value chain opportunities). Then use change management techniques together with quality leadership, align the
organisation towards the newly defined goal and consistently drive success. Of course, even smart strategies can fail:
the environment can change, competitors can move unexpectedly, etc. Then comes the need to possibly align again,
revisiting all previous risks. High quality leaders will recognise this. But, of course, mistakes can also be made at the
leadership level. This takes us to our next and last level of risk, governance.
First, assess the strategy and the move considered. Then confront to competitors’ moves, customers’ needs and
value chain opportunities). Then use change management techniques together with quality leadership, align the
organisation towards the newly defined goal and consistently drive success. Of course, even smart strategies can fail:
the environment can change, competitors can move unexpectedly, etc. Then comes the need to possibly align again,
revisiting all previous risks. High quality leaders will recognise this. But, of course, mistakes can also be made at the
leadership level. This takes us to our next and last level of risk, governance.
Governance Check
Leaders fail. It happens. It is not the worst problem by itself. Leaders are human and while the selection process may
be rigorous, good leaders in some circumstances may prove to be bad leaders in others. The problem comes when a
failing leader is in place for too long. This is where governance risk happens. In order to control for that risk,
governance rules need to apply. Not to constrain but simply as a matter of fact, to make sure that leadership failure,
when it happens, does not become too costly to the organisation.
Boards at Risk 9
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There are some well-known governance risk factors that can be self-checked in any organisation. In particular, classic
risk factors include:
1. A poorly defined role of the board
2. A domineering CEO (or chairman)
3. An inefficient board: size, independence, personalities, the role of outsiders, the structure of the
board committees, all matter
4. Conflicts of interest at the board or senior management level
5. Compensation schemes that have strong side effects
6. A board that is not well aligned to its mission (whether supervisory, strategic, connecting or hands-
on).
7. A poor governance culture (values, understanding and dynamics)
Good governance should be maintained even when things go well. Actually, the best time to make improvements is
when things are going well because it is usually not as hectic as when things are not going well. Once the structures
are in place for continued corporate awareness, good governance is ensured.
II. TODAY’S RISKS: DISRUPTION IS THE WORD
Today’s world is going through a stage of social transformation. Chief among the buzzwords heard in the boardroom
are terms like “disruption”, “disruptive”, “disruptor”. Organisations are coming to terms with the notion that
expecting the future to bring more of the same, and extrapolating directly from the past when shaping and
preparing for the future, may be the riskiest behaviour of all. They are also aware that disruption, innovative
challenge and creative destruction are rarely initiated or necessitated by the centre or “the core”. Nearly always,
these changes come from what they have traditionally regarded as the periphery of their universe.
On the socioeconomic front, young people are the ones who have internalised to an unprecedented degree the
logic, necessity and value of disruptive change. In a stark departure from the past, theirs is a generation that is no
longer virtually guaranteed a rise in living standards, let alone one that is achievable by seeking the security that
once came with a lifetime spent in a corporate job. Therefore it is not sur- prising that the millennials have been on
the vanguard of blurring many familiar lines in consumer habits, services provisioning, content creation and
consumption, and organisational behaviour.
The inevitable question, and one that has become pressing for many boards, is: how to reconcile this unstoppable
process of breaking old rules and paradigms with the expectation, heightened in the after- math of the 2008 crisis, of
companies subjecting themselves to tighter governance and more stringent regulatory standards? And furthermore,
how to make boardroom diversity – of generations but also perspectives and attitudes – a truly strategic, as opposed
to general, principle of board composition?
Drawing on his experience in successfully transitioning from a CXO role with a global multinational corporation to
heading a start-up company, Erich Hunziker voiced his encouragement for companies to reinvent themselves on a
daily basis, almost as if they didn’t possess a past at all. Illustrating how a board can harness the creative energy and
imagination of the company’s young executives, he recommended assembling a task force of high-potential workers
aged 35 and below; encouraging them to visualise the market in which the company will operate in five or ten years’
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time; articulating what type of an organisation, in their view, is likely to be a winner in this newly-evolved market
landscape; comparing this projection with where the company stands today; and analysing and discussing the gap.
“It is simple: if we just wait,
the future will arrive and
brush us aside.”
Erich Hunziker, Chairman, BB Biotech AG
Although it may be tempting to outsource this exercise
to a team of external consultants, this would very likely
defeat its purpose. Granted, a CEO may be nervous
initially about the outcomes and the broader
ramifications. But evidence shows that most CEOs will
eventually not only support the initiative but in fact
actively use it to generate new ideas for boosting the
firm’s competitiveness and long-term business
prospects.
Boards’ guidance is also essential in designing the best framework for experimenting with and materialising
disruptive innovation. Audience members concurred that in highly-regulated industries where an organisation’s
conduct is closely scrutinised by regulators, it can be difficult tread on grey areas – no matter how noble the spirit of
intrapreneurship and of anticipating disruptions. Discussion pointed out that useful as it is to embrace new ways of
thinking, at the end of the day it may often be more practical to incubate outside the organisation. But this should
not stop companies, including large enterprises operating in strategic sectors, from finding ways to plant modest
amounts of seed money, ideally at some remove from the corporate centre. That may be a great way of eliciting new
thought and perspectives on trends that are soon bound to become critical for the organisation’s profitability and
well-being, such as overcoming long-standing barriers and bringing innovative products and services across
international borders. In addition, securing the presence of a board member in these sessions can be a good way of
exerting pressure, albeit subtly and indirectly, on the board itself.
Is governance killing entrepreneurship?
The competing objectives of regulation and entrepreneurship may be a source of tension in the boardroom. This is
something that quality boards must accept. The dominant discourse over the past decade may have shifted to
regulation, compliance and risk aversion, but entrepreneurship never ceased to require passion, dedication – and
indeed, a lot of risk. Against this background what this means is that a board member’s ideal mindset can be
described as that of an “optimistic paranoiac” – steadfast in furthering the company’s aspirations yet constantly
preparing for new threats.
There are many facets of a board member’s previous
experience that will stand him or her in good stead when
approaching the new dynamics of today’s boardroom.
Teo Swee Lian related her journey as a former industry
regulator joining the board of a private company in her
new capacity as independent director. She believed that
her years in a regulatory role had equipped her with
quite a few of the ‘softer’ attributes that are necessary
to maintain a diplomatic but constructive relationship
with management; to know how and when to ask
probing questions, and to persevere, with a healthy dose
of scepticism, in the probing, especially when decisions
and situations are presented as containing no risk or low
“I haven’t seen a board that was
highly successful in the absence
of dissent. There must be
creative tension and rumblings
on dissent surrounding major
board decisions.”
Didier Cossin, Professor, IMD
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risk.
One of the lessons which was served up by the recent crisis, and which has direct repercussions for how boards
recruit directors, has to do with the purportedly rational and quantifiable nature of markets. As Tan Suee Chieh
observed, numbers clearly aren’t everything. As immensely useful as quantitative and mathematical models are,
particularly for an industry player that has traditionally been active in the insurance space, many of the qualities and
attributes a director should display will by definition transcend the bounds of statistics and of mathematical
understanding. In the post-crisis business environment, these are precisely the qualities that have come to the fore:
Caring, wisdom, all-round knowledge, the ability to penetrate the exterior and go to the heart of a matter.
In order to nurture creative, entrepreneurial and at times disruptive thinking, board committees must likewise learn
to anticipate, rather than stick to old and established formal roles as sign-off bodies. Similarly, the board chairman
has a role to play in structuring the various committees and making sure that individuals feel comfortable voicing
their ideas and observations without undue self-censorship or running the risk of being branded as rabble-rousers.
Of course, and partly reflecting cultural traits and sensitivities rooted in specific national as well as organisational
contexts, many companies currently do not address the chairman’s performance as directly as they should. The
possibility of rotating the chairman more often should not be seen as taboo; in fact, in specific sets of circumstances,
chairman evaluation should expressly allow for chairman removal.
Business and society: business in society
The dual imperatives of strengthening governance and embracing disruptive change have raised fundamental
questions about the role of business in society, and exposed the limitations of some of the 20th century’s most
influential management theories. Yesterday’s business mantras like “maximising the return to shareholders” have
come to be seen as embodying a focus on the short term, and a limited view of the many and complex stakeholders
who are affected by business activity. For too many market players in the pre-crisis world, the key motivation
became to manipulate the market in order to scoop up the rewards. At present, in keeping with the prevalent spirit
of soul searching and going “back to basics”, simple words such as “good” have been bandied about more than ever
in before in modern-day executives’ memory: Building on good foundations; starting with good intentions; pursuing
the common good, etc.
The back-to-basics approach has also inspired a number
of leading organisations to revisit, re-examine and
reinterpret their historical roots in pursuit of new
relevance. The story of NTUC, for instance, has been
largely synonymous with the story of modern
independent Singapore – both dating their origin back to
the 1960s. Neither the phenomenal growth in the
nation’s wealth over the past five decades nor the
country’s transformation into one of the world’s most
advanced economies have dampened NTUC’s tireless
quest for relevance. Staying true to its ethos of social
enterprise has been the main principle to guide the
organisation and the 62 affiliated unions under its
umbrella, even as the landscape of social services
delivery evolves and new competitors continue to
emerge.
“As an independent, you have a
view of things you can draw on
when making decisions. You bring
a perspective; you add value. In
many situations, this gives you
the ability to connect the dots for
management.”
Teo Swee Lian, Independent Director, Singapore
Telecommunications Limited
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At first glance, the social need in 2016 may have different characteristics compared with 1969, when the impetus
was on maintaining fair prices and providing insurance to workers who would not be eligible under conventional
insurance terms. Nonetheless, going back, continually and creatively, to the spirit and the values of the
organisation’s founding fathers in the 1960s has proven a rich source of ideas and solutions. These speak to the
fabric of Singapore’s 21st-century social infrastructure and its attendant issues such as health, aging and income
inequality.
Increasingly, achieving social impact means borrowing from social science disciplines such as philosophy and
psychology. To be a true partner to one’s stakeholders means to understand the underlying motivations and
collective aspirations involved. There is growing recognition, especially among the business communities in
emerging markets that many of the western leadership models were built on facts and numbers. As a result, they
turned out to be under-socialised. The search is on, in Asia possibly more so than elsewhere, for locally relevant,
historically sensitive and culturally appropriate models of genuine leadership and organisational stewardship. The
experience of the region’s well-stewarded companies like Matsushita, Tata, Hai’er and many others shows that once
business leaders tweak their thought paradigms, “profit” can be defined, and measured, in radically new ways,
including through investing in people, utilising social capital and making a contribution to society.
Testing the limits of governance
As with all rule-based undertakings, governance is not devoid of the dangers of formalism – in other words, of going
through the motions, creating ever more layers of bureaucracy and upholding the letter but not necessarily the spirit
of the originally-agreed purpose. The stakes are high, especially given that the large-scale value destruction that
occurred during and in the aftermath of the global financial crisis has been shown to stem from insufficient
regulation. But many board members agree today that the pendulum may have swung too far in the opposite
direction, continuing to pile up new rules on businesses in a measure that may be starting to border on counter-
productive. Where rules could be complied with through simplicity of action and honesty of conduct, an attitude is
beginning to prevail which could be described as “if it is in writing, it must be true.” In consequence, companies’
annual reports have ballooned from 50 pages to 300 and more pages. Once a governance code – meant to be a tool
for guidance has stipulated, for example, that annual reports should be fair, balanced and easy to understand,
almost inevitably a flurry of written guidelines and
definitions crops up, offering detailed definitions of just
what exactly is meant by fair, balanced and easy to
understand. Companies that have never in their history
crossed paths with instances of child labour can become
overnight darlings of good governance by adding this
particular criterion to their checklist. In this governance
“game”, the sense of absurdity is palpable.
Panellists and audience members agreed that no
stakeholders’ interests are meaningfully served by board
members and executives getting bogged down in “ticking
boxes”.
“Our existential question is: how
to protect and enhance our legacy
for the next generation while
consistently creating social
impact?”
Tan Suee Chieh, Group CEO, NTUC Enterprise Co-
operative Limited
As Erich Hunziker commented, if a company was to strive to please everyone, it would be doomed to perish. There is
no denying that at particular points in time, a company will do well to preoccupy itself with making money before it
can afford to think about giving back to society. This is not to say that small companies are unable to contribute. The
EU’s refugee crisis, to refer to a current topic, has mobilised many SMEs across Western Europe to create
employment and absorb more migrant workers.
Boards at Risk 13
Copyright 2016 © IMD - Temasek Management Services Pte Ltd, All rights reserved.
Know your customer
The old dictum of understanding one’s customer still rings true in the post-crisis world. According to Teo Swee Lian,
putting the customer first and acting consistently for the customer’s benefit has in too many companies given way to
an operation revolving around profit centres and of pushing products onto customers who may or may not have use
for them. Customer focus must permeate right across the organisation.
This includes the board, whose members should have
intimate knowledge of the issues the company’s
customers are tackling, as well as of what levers and
mechanisms and internal culture the company has put
forward to reinforce this focus. How much board
members actually know about the customers and about
their own company’s organisational culture can be a
good litmus test and a powerful indicator of the
company’s preparedness for future risks.
“One of the biggest risks facing
the corporate sector is not to be
integrated with society – or
worse, to be marginalised in
society.”
Didier Cossin, Professor, IMD
As participants noted in some of the concluding comments, personal integrity of the chairman and the CEO are of
utmost importance amidst the dramatically changing business and corporate realities. Stress testing can be another
source of great strength in watershed moments. In this context, we must pay attention to the way successful
organisations build scenarios and beyond that, create compelling narratives about their organisations.
Conclusions
When companies have done their physical check, their mental check, when they have smart strategies in place and
when their structures ensure good governance, there is a sound basis for success even during difficult times. Difficult
times then suddenly become times of reincubation, times when a company’s distinctiveness can be deepened and
new opportunities fuel success. For successful companies at handling their risks, these are the times now. It is key to
rethink governance versus entrepreneurship and whether governance is killing the latter. No business will prosper in
changing times without a healthy amount of entrepreneurship and many a board has had nefarious impact there. As
boards evolve from protecting companies from the worse to being a competitive asset towards success, new types
of diversity can be encouraged, that will include social understanding and government abilities. They will test the
limits of governance for the better and will regenerate their board’s activities in a distinctive ways, thus not only
assessing and managing risks but also creating new opportunities for the organisation in a complex landscape.
Boards at Risk 14
Copyright 2016 © IMD - Temasek Management Services Pte Ltd, All rights reserved.
TMS Academy
TMS Academy is the integrated leadership development arm of Temasek
Management Services (TMS), a fully-owned subsidiary of Temasek Holdings. We are
dedicated to the mission of developing Asian business leaders and supporting the
building of organisational capabilities to develop senior-level talent. We offer a wide
range of high-impact, practice-oriented open programmes and customised solutions
in partnership with some of the finest institutions and critical insights for executives.
Temasek Management Services Pte Ltd
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60B Orchard Road #06-18 Tower 2 The Atrium@Orchard Singapore 238891 www.temasekmanagementservices.com.sg
For enquiries, please contact:
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The IMD Global Board Center
The IMD Global Board Center is committed to supporting your company’s long-term
success through its board performance. Our unique combination of open and
customised board education programs aims to develop your board’s competitive
advantage and realise its full potential. These programs bring together world-class
thought leadership, our own cutting- edge governance research and inspiration from
best board practices of leading organisations in Asia, Europe, the Americas and the
Middle East.
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